What Is Anchoring?

A colleague asked me: “Mark, what is anchoring? I wanted to get your explanation of the concept with regard to pricing and maybe an example if you have one.”

Anchoring is a strange phenomenon where the mere act of thinking about a high number biases that person toward higher numbers. Dan Ariely, professor of psychology and behavioral economics at Duke University conducted a fascinating study where he and his colleagues asked people to write the last two digits of their social security number. Then they asked them to bid on a specific product. People with higher social security numbers bid more for the products, sometimes more than twice as much. Getting people to think of a high number anchored them to higher prices even though the numbers had nothing to do with the price or the value.

How is this used in pricing? There are several examples:

Negotiations. When you you start with an extreme bid, you anchor the other person. That could bias your opponent in your direction. Of course, too extreme of a bid may cause them to discontinue negotiations immediately.

Advertising. If possible, put a number toward the top of the ad that is much bigger than the price. The number doesn’t have to have anything at all to do with price. It may be that last month you sold 1,000 units. Then, when people see your price, it looks smaller.

Presenting good, better, best. Often, when you present three solutions, you want to start with the best, the most expensive one. Then, the other ones look less expensive.

Sales conversations. Early in the conversation, say something with a big number. For example, “we killed 3 million bugs last year” or “over 10,000 companies have a problem like this.”

Although this phenomenon can be proven in experiments, in my opinion, it is not very powerful. In the right situations, it is worth trying, but focusing on creating and communicating value has more influence on buyers’ decisions.